Fed’s Yellen: Rate Hike Not Likely Coming Soon

Fed’s Yellen: Rate Hike Not Likely Coming Soon

Federal Reserve Board Chairwoman Janet Yellen gave an upbeat message to lawmakers Tuesday: employment has been improving “along many dimensions,” domestic spending and production have been increasing, and real gross domestic product (GDP) is now estimated to have increased at a 3.75% annual rate during the second half of last year.

However, in testimony before the Senate Banking Committee, Yellen noted that U.S. inflation continues to run below the FOMC’s 2% objective. “In large part, the recent softness in the all-items measure of inflation for personal consumption expenditures (PCE) reflects the drop in oil prices,” Yellen said.

Yellen also said that the FOMC considers it “unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings.” The Fed’s next policy meeting is March 17-18.

If economic conditions continue to improve, as the FOMC anticipates, she said, the Committee “will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis.”

The timing of normalization will depend critically on continued labor market improvement.

Said Yellen: “Provided that labor market conditions continue to improve and further improvement is expected, the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when, on the basis of incoming data, the Committee is reasonably confident that inflation will move back over the medium term toward our 2% objective.”

Jim O’Sullivan, chief U.S. economist for High Frequency Economics, says that Yellen’s testimony was “fairly upbeat on the recovery, consistent with the expectation that policy normalization will begin before too long.” However, “she was not definitive at all on timing, but there was no sign of any significant change in views on the economy relative to those laid out at the time of the December press briefing.”

Said O’Sullivan: “There are still risks, of course, and for now inflation is too low, but officials continue to anticipate that inflation will move back toward 2% over time.”

As to oil prices, Yellen noted that while the drop in oil prices “will have negative effects on energy producers and will probably result in job losses in this sector, causing hardship for affected workers and their families, it will likely be a significant overall plus, on net, for our economy.”

Foreign economic developments, however, “could pose risks to the outlook for U.S. economic growth,” Yellen said.

She added that the uncertainty surrounding the foreign outlook “does not exclusively reflect downside risks. We could see economic activity respond to the policy stimulus now being provided by foreign central banks more strongly than we currently anticipate, and the recent decline in world oil prices could boost overall global economic growth more than we expect.”